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Cracking the Marketing Code

Marketing 101. Cracking the Marketing Code . Training Session Columbia Business School October 29, 2010. Objectives. Look smart and knowledgeable in CPG interviews Actually learn something Basic marketing concepts Some clever tools to crack the code Have a global view.

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Cracking the Marketing Code

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  1. Marketing 101 Cracking the Marketing Code Training Session Columbia Business School October 29, 2010

  2. Objectives • Look smart and knowledgeable in CPG interviews • Actually learn something • Basic marketing concepts • Some clever tools to crack the code • Have a global view

  3. Basic marketing concepts

  4. How they relate Corporation Customer Segments Customer Segments Target Customer Segments Marketing Mix 4P´s by segment Competition

  5. A simple example…us AM Inc. 1st. yr. Columbia MBA´s Marketing Mix Product – CPG marketing tutorial Place – here Promotion – email invites Price ??? • Value proposition – 25% increased chances of getting CPG summer offer • How much would you pay? • How much should I charge?

  6. Add a competitor 1st. yr. Columbia MBA´s AM Inc. RK Inc. Offers same product at 20% discount across the hall Lower my price ? Differentiate product and promote it? Segment and target? What do I do?

  7. A segmented strategy 1st yr. Columbia MBA´s 35% 65% Analitics More likely to succeed Better fit with my capabilities Leave to RK AM target Tailored marketing mix Product CPG analytical marketing Pricing premium Promotion to analytical “elite” Place here plus “web tutorial”

  8. Basic marketing concepts

  9. Customer segmentation What is Segmentation? Why is Segmentation Useful? • “The science of finding, within a heterogeneous customer universe, homogeneous groupings of customers which meet segmentation criteria defined by us” • “Segment quality improves dramatically to the extent that we utilize both subjective and objective criteria to define the segments” • Allows us to assign people and limited resources more efficiently and effectively • Facilitates the uncovering of needs and opportunities not exploited by our current approach • Helps orient the design of products and services for specific sub-groupings of customers, shoppers, and consumers • Results in significant improvement in the impact of marketing initiatives (programs and promotions) and in-store execution • Usually results in better balance between benefits and the costs required to generate them

  10. Segmented value propositions Customer Requirements and Satisfaction • Service levels • Product portfolio • Service offering • Commercial offering • Channels • Sales and distribution model Intensive use of market research tools – e.g., Choice analysis, Conjoint analysis, cluster analysis, etc. Value Proposition Cost to Serve Competing Value Propositions Economic Benefit to Customers • Direct cost to serve – sales, transportation, warehousing, etc. • Commercial terms – channel margins, credit terms • CTS optimization opportunities must be considered • Brand and product portfolio strength • Value proposition • Client satisfaction with competing value propositions • Impact on ROI vs. competition and other product categories • Include a holistic assessment including all elements of the value equation

  11. 19% Overall Market Overall Market Segmentation and targeting process B Assess Market Structure & Trends Define Market C A Target Segments Set Strategic Objectives Identify Attractive Market Segments Define Market Overall Market Right D Analyze Right-to-win Select Target Market Segments Perform Competitor Analysis F E

  12. Define market B Market Definition: Aquafina Bottled Water Example • What does PepsiCo aspire to be in long-term? • How can the aspiration be translated into a competitive goal for Aquafina? • What else can the company potentially sell with its current capabilities? Options 1 Share of Water 2 Share of Beverage 3 Share of Stomach • Substitute products • Non-alcoholic beverages • Salty snacks • Sweet snacks • Fruits and vegetables • Substitute products • Carbonated drinks • New age drinks • Nectar • Coffee and tea • Substitute products • Other brands of bottled water • Tap water • Filtered water Market of snack food and beverage Market of non-alcoholic beverages Market of drinking water

  13. Asses market structure and trends C Non-alcoholic beverages value added path CSD B Brands CSD A Brands Fruit Nectars/Drinks B brands Juice B Brands Fruit Nectars/Drinks A brands Juice A Brands Rural Brazil Rural China Rural Brazil Rural Russia Rural Russia Urban China

  14. Identify attractive market segments D Sugar confectionery consumer need diagram Expressive ENJOYMENT Pleasure Candy Kick Sharing Individual Social Pastilles Conscious Stimulus Chewing gum Relaxation Functional Refreshment REFRESHMENT Controlling

  15. Analyze “Right to win” E Examples of capabilities led extension into adjacencies Example Description Advantaged Distribution System • Built a cost advantaged DSD delivery capability that was initially leveraged with existing products to out-execute competition • Further leveraged scale with innovative new products and finally geographic expansion • Leveraged R&D technology and consumer insights to introduce “Crest Whitestrips” and now own 70% of that category • Leveraged “Crest Whitestrips” technology to create a Joint Venture with Clorox to launch new Glad products Advantaged Innovation Level of Confidence Regarding Benefits • Leveraged strong consumer insights capability and position in Latin America to create an ethnic marketing capability in the US • First used this capability to attract new consumers in key markets (e.g. Miami, Los Angeles) • Later adapted the value proposition for these consumers with new products and marketing approaches Advantaged Ethnic Marketing Advantaged Customer Capabilities • Traditionally had the one of the strongest “in-house” sales organizations • Built a comprehensive “retail execution” capability with its sales organization – improving revenue execution through merchandising effectiveness and greatly reducing retail out-of-stocks

  16. Identify attractive market segments F Emotional • "Sportler" • "Techniker" • "Yuppies" • "Sparer" Price Top Image • "Statusbewußte" • "Rationalisten" Rational

  17. Position with different look and feel Sextuplets Piech´s common components strategy: a few token gimmicks and the same products

  18. Basic marketing concepts

  19. Price and product attributes Vegetable oil in China CONVENIENCE COST QUALITY 20% premium 11% premium 24 RMB / 1.8 L 13.33 RMB / L ~50 RMB / 5 L ~10 RMB / L 60 RMB / 5 L 12 RMB / L

  20. Snacks value added path Extruded B Extruded A Chips B Chips A Rural Brazil Urban China Rural Brazil Urban Russia

  21. Price points and premiums Extruded B Large Size, Small Size Chips A Large Size Small Size Rural Urban Chips A, Large Chips A, Small Extruded B, Large Extruded B, Small 21 21 21

  22. Price points…”affordability”

  23. Place…retail channels evolve Retail channels evolution ILLUSTRATIVE Growing convenience stores & Discounters for Low Income Consumers 100 % Traditional Trade Small Format Modern Trade Large Formats stalled Low penetration among Low Income Consumers 50 % Large Format Modern Trade 0 % India China Brazil & Mexico US & Europe

  24. From traditional to modern trade Traditional trade in Anhui Hypermarket in Shanghai

  25. ”Go to Market” model Guidelines for a Successful Go to Market Model • Understand product dynamics and requirements • Understand customer requirements/satisfaction • Understand competitors offering • Segment customers based on needs Understand Business and Customer Requirements Successful Go-to-Market Model Upgrade Go-to-Marketand OrganizationalCapabilities Crack the Economics to Serve Each Channel • Understand cost-to-serve and profitability drivers • Understand true cost of indirect channels vs. direct service • Balance and control commercial terms and discounts vs. direct service needs • Reengineer go-to-market and supporting organization infrastructure to improve cost-to-serve • Redefine sales force activities and call standards • Improve effectiveness of key processes • Market execution/OTC • Account planning • Business review and control • Define optimal sizing, routing, profiles and skills • Improve tools • Align measurement and rewards Craft an Optimal Value Proposition for Each Channel • Define optimal channel mix and number of WH’s/Distributors • Define WH/Distributors roles • Balance service levels – call content, call frequency, fill rates, leadtimes –vs. cost-to-serve • Reengineer commercial terms and service policies

  26. Crack the economics to serve “Profit-to-Serve” Equation • Volume (reach and lift) • Number of accounts reached • Shelf and cold space • Categories and # of SKUs carried • Out of Stocks and Service Levels • Net Price Realization • Consumer price • Trade margins • Trading terms Revenues Profit to Serve less • Shopper and Customer Marketing • In-store advertising • Shopper marketing • Customer activation • Trade Promotion • Asset Amortization • Working Capital • Direct GTM and Sales Costs • Sales force • Merchandising • Sales supervision • Delivery/secondary transportation • Custom products and packaging • Supply chain and DC requirements Costs

  27. 36% 37% 29% 25% 24% 26% 22% 22% 21% 22% 18% 15% 19% 17% 15% “Modern Trade” economics Route-To-Market – Variability Among Retailers in Cost to Serve $ Per Stat Case Customer Costs as a Percent of Sales Dollars Source: BAH Analyses

  28. “Traditional trade” economics Varied Customer Contribution 40% 20% Mean Customer Profitability 0 % Customer Profitability (-20%) (40%) (60%) (80%) 100 1,000 10,000 100,000 1,000,000 (kg) Client Size Channel Categories Customer 3 Customer 4 Customer 1 Customer 2 Customer 5 Customer 6 Customer 7 Customer 8

  29. Channel definition Break-Even Point of Direct Service Additional Go-to-Market Benefits Due to Additional Wholesalers Leading Products Complementary Products New Products 8 7 Benefits of direct service If a customer buysless than 4 - 5 units, it cost less to use distributors • Better coverage of total portfolio • Better service levels 6 5 Go-to-Market ($MM) 4 US$ Volume 3 Distributors and WH´s margin 2 1 Direct Service Cost 0 0 1 2 3 4 5 6 7 8 SKUs Order Size (Units) Go-to-Market using Current WH´s Incremental revenues due To additional customer base Source: BA&H Analysis RPMX-JGB-Feb23-06

  30. Value offering by channel Survey / Conjoint Analysis Value Offering Product Offering Segments Maximize value/ Minimize Cost Service Levels Delivery Model Optimized Cost to Serve Negotiation Oriented Finance Oriented % CTS / Revenue Segments Trade Terms/ Support volume

  31. Promotions…”ROI Marketing” Marketing Investments Market Results Purchase Behavior • Market share • Unit sales • Price premium • Penetration of key segments • Etc. Television SOM Brand and Product Awareness affects … … which in turnaffects … Print Billboards (OOH) $ Spend Consideration Intent Consumer Events Promotions Purchase Loyal- -ty RelationshipMarketing Sponsorships • Allocation of funds across marketing levers • Optimization of spending within each lever

  32. Allocation across levers EXAMPLE Effectiveness: Awareness / GRP – Relative to TV(1) Media Effectiveness x Efficiency (Relative to TV – 100%) 1428% 12.9x 1028% 3569% 10.7x 19% 34% 1% 12.9x 3% 100% 25.0x 2.5x Efficiency: Cost per GRP’s (US$) 69,204 4.4x 41,522 173,010 4.0x 1790 319 40 1.0x 100 682 (1) Relative effectiveness to TV = (Media awareness /Media GRPs) / (TV awareness / TV GRPs) Source: Economic Model; Booz Allen analysis

  33. Optimization within levers ROI Over All Events and Products (Four Account Sample) Sample Trade Promotion Event ROI Kmart -63% median event ROI -63% median event ROI. -48% average ROI 91% of events yield a negative ROI Event ROI Events Event ROI Product 1 Event ROI -43% median event ROI Events Events Notes: (1) Assumptions made on list price, feature cost, and that retailers retain their base margin (2) ROI=(Revenue-Cost)/Cost Source: IRI Scanner Data; Manufacturer Cost Data; Booz Allen analysis

  34. Competitive impact Share of Spend vs. Market Share (2004 to 2006) 2004 to 2006 Change in Spend vs. Change in Market Share LG Kenmore Whirlpool Kenmore GE Whirlpool 2004 to 2006 Point Increase in Share of Media Spend Share of Media Spend GE LG KitchenAid Kitchen Aid Maytag Maytag Share of Market – Value All Appliances 2004 to 2006 Point Increase in Share of Market Source: TNS Data, AHAM, Traqline, Booz Allen Analysis

  35. Scaleimpact Beer Brands Marketing investment by hectoliter 25 25 Amstel Amstel Light Light 20 20 Coors Coors 15 15 USD/HL Michelob Michelob Light Light 10 10 Heineken Heineken 2 2 Miller Genuine Miller Genuine R R = 89% = 89% Miller Miller Lite Lite Draft Draft Co ors Coors Light Light 5 5 Corona Extra Corona Extra Budweiser Budweiser Bud Bud Light Light - - 0 0 5 5 10 10 15 15 20 20 25 25 30 30 35 35 40 40 45 45 Millionsof HL/year Fuente: Morgan Stanley Quarterly Report. Beverages US. Análisis BAH

  36. -73% -44% Consumer purchase funnel Brand A Brand B Potential Problem • Inadequate advertising/PR support? • Positioning not unique, meaningful? 99% 99% Awareness • Positioning not unique, meaningful? • Product, service offering does not deliver positioning? 27% 55% Preference 0% -16% • Perceived pricing overrides benefit of positioning? • Perceived availability (channels) doesn’t support positioning? 27% 46% Intent -30% -65% • Actual price/value is different from perceived price/value? • Actual availability (channels) does not support positioning? • Not easy to find in channels? • Other benefits, products are advertised in channel? Purchase 19% 16% Product positioning is not truly differentiated or compelling Retail outlets steer customers to competitive products on which the outlet earns superior returns Identified Issue: Source: Client Data; Booz Allen analysis

  37. Marketing vehicles mix and purpose Consumer Purchase Funnel Marketing Vehicles Conventional Alternative Awareness • Mass Media • Outdoor advertising • Product placement • Unconventional print • Internet marketing • Graffiti advertising Consideration • Event marketing • Buzz marketing • Guerrilla marketing • Viral marketing • Mass Media • Outdoor advertising Trial • Event marketing • One-to-one sampling • Direct marketing • Lifestyle shop placement • Switch Selling • Broad market sampling Occasional Buyer • Mass Media • Outdoor advertising • Promotions • Pricing • Direct marketing • Event marketing • Lifestyle shop placement Regular Buyer Retention Pene -tration

  38. Search for long term value value EXAMPLE Incremental Spending on Marketing Levers and Impact on EBITDA, SOM and Enterprise Value Managing Trade-off’s • Marketing investments drive share growth, but profitability tends to decline as incremental share becomes more expensive • In the short-term, the right decision is to maximize profits which requires incremental investments until they begin producing negative returns • However, in the long-term, the more profitable decision may be to grow share, even at a loss, if this enables superior market power / sustainable competitive advantage • However, getting this right is an iterative process and the trade-offs need to be clearly understood and carefully managed • This process provides significant insights into the dynamic impact of marketing investments on share and earnings 380 4.5 EBITDA (Annual) Enterprise Value 375 4.0 370 3.5 365 3.0 360 2.5 EBITDA (US$ MM) Enterprise Value ($B) 355 2.0 350 1.5 345 1 340 0 0 $10M $20M $30M $45M $65M Incre. Spending 0 2% 4% 6% 8% 10% Incre. Share Base Vol Trend 0 (2%) (1%) 0% 1% 2% Source: Client Data; Booz Allen analysis

  39. In summary Grab the big picture Pick your fights Strive for top value

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